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Europe opens its doors to services, but are those doors open wide enough?

The EU's Single Market took another step forward on 16 February, as the European Parliament voted to open Member States' borders to the service sector, but experts warn that the legislation may not go far enough to liberalise the service sector and encourage growth.

In one of the most controversial and hard-fought votes in the Parliament's history, MEPs eventually decided by 391 to 213 votes to allow the market for services to operate cross-border in the same way as that for goods, thanks to an unlikely partnership of the EPP-ED (conservative) and PSE (socialist) groups, although both groups had their defectors and abstainers.

However, one of the key proposals, to allow service providers to operate abroad under their domestic regulations, was rejected. Depending upon your viewpoint, this is either a victory for protecting standards across the EU or a victory for the wealthier nations who will maintain a competitive advantage.

While the free movement of services is enshrined in the EU's Treaties, in practice, Member States effectively restrict the free movement of services through national laws, which differ from state to state. The deregulation of service industries across internal EU borders is considered essential by many observers, and is addressed in the recent Aho group report on innovation in Europe. The report specifically identified national barriers to trade and services as genuine obstacles to growth.

The Aho report stated that national barriers 'seem particularly acute in the service sector, which [...] is critical to productivity growth. A recent study concluded that the lack of demanding and novelty-seeking customers who are willing and able to pay for upgraded, improved or novel services is a major barrier in service innovation which enterprises find difficult to overcome.'

However, finding a satisfactory way of providing a level playing field has proved difficult. One proposal was to allow service suppliers to work under their national laws while providing services abroad. It seemed an elegant solution, but rules governing the service sector differ from country to country, sparking fears of a 'rush for the bottom', where companies will automatically opt to be based in the country with the fewest regulations and standards of safety and environmental protection.

Professor Luke Georghiou from the Manchester Business School was one of the authors of the Aho report, and gave his reaction to the Parliament vote to CORDIS news: 'I have no inside information and have digested only the press reports so far, but my reaction is that this is a good step forward, but a step not far enough to preserve and afford the social Europe we want. This is an example of the EU holding up innovation - if we can't fund good and proper research, we will fall behind. The real threat is global competition.'

While the county of origin principle was excluded by MEPs, the 'Freedom to provide Services' was approved. Member States are required to 'ensure free access to and free exercise of a service activity within its territory'. Exemptions can be made 'where they are justified for reasons of public policy, public security, social policy, consumer protection, environmental protection and public health', but such exemptions must be 'non-discriminatory, necessary and proportional'.

Excluded sectors include, 'labour law, i.e. any legal or contractual provision concerning employment conditions, working conditions, including health and safety at work, and the relationships between employers and workers'. Additional sectors such as public health, postal, social and legal services, broadcasters, gambling and public transport are also excluded.

Charlie McCreevy, Internal Market Commissioner, said: 'I am convinced that we can have a workable services directive which will provide real value added. In all of this, the challenge is to get the balance right. We need a directive that will facilitate the cross-border provision of services and at the same time, we need to ensure that legitimate public policy considerations can be safeguarded.'

'On the Commission side we will begin work on preparing a modified proposal based on the vote in the European Parliament,' he continued, 'I look now to the Council of Ministers to complete the work which has been done by Parliament.'

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